Introduction
The Income Tax Appellate Tribunal, Bengaluru (‘ITAT’) held in the case of Shanmugam Ravi v. DCIT,[i] that any expenditure incurred by the assessee subsequent to the business had been discontinued would not qualify as ‘business expenditure,’ and hence not be allowed a deduction under s. 37(1) of the Income-tax Act, 1961 (‘Act’), especially when there was no likelihood of the business being revived.
Brief Facts
The appeal was filed by Mr. Shanmugam Ravi (‘Assessee’), aggrieved by the order passed by the Ld. assessing officer (‘AO’) under s. 143(3) read with 144C (13) of the Act, whereby the Assessee was disallowed to claim a ‘business loss’ of approximately Rs. 11 lakhs for the financial year 2020-21 on the grounds that the said business had ceased to exist during the said time. Hence, such a deduction could not have been allowed.
The facts that precede the passing of the AO’s order are entailed herein below:
The Assessee was engaged in outsourcing housekeeping services. The said business was, however, transferred to another company in 2017.
Subsequent to the said transfer, the business continued to face certain unresolved litigation pertaining to income tax and law issues. Thus, the Assessee was compelled to maintain staff and engage consultants to handle the same.
Considering that the Assessee was incurring certain expenditures on the erstwhile business’s unresolved litigation and compliance proceeding, the Assessee construed such expenditure as ‘business expenditure,’ deductible under s. 37 of the Act.
The Assessee’s assumption was based on the fact that as long as the issues pertaining to the erstwhile business remained unresolved, the business activity/operation would be deemed as ‘continuous,’ and thus, the order passed by the AO, disallowing such claim was arbitrary and bad in law.
Held
The ITAT, while relying on the judgment passed by the Hon’ble Supreme Court in L.M. Chhabda’s case[ii], upheld the AO’s order, disallowing the Assessee to seek deduction under s. 37 of the Act.
The ITAT observed that various factors were taken into consideration while allowing the deduction of losses/business expenditures under s. 37 of the Act. The foremost factor in allowing such a deduction is that such expenditure/ loss should have been incurred during the course of business, and it should be incidental to the business being carried out. Further, the ITAT also observed that such a deduction could be allowed if the expenditure is incurred to upkeep/maintain the business or prolong its existence.
In the present case, the Assessee's business was discontinued long ago. The so-called expenditure was neither incurred during the course of the business nor in the furtherance of reviving/maintaining or upkeeping it. Hence, as the Assessee was not carrying out any business activity during the relevant assessment year, and there was no likelihood of the business being revived, the revenue department disallowing the deduction was correct and justified.
Our Analysis
The scheme of s. 37 of the Act is to prima facie lower the tax liability and burden of business enterprises by providing various kinds of deductions against the expenses incurred by them during the course of business or in the furtherance of business. However, it is essential that deductions sought by the assessee under s. 37 of the Act aligns with the purpose of the Act, ensuring that the revenue department disallows any unreasoned/unjustified deduction that fails to fulfill the criterion to seek deduction.
Any part of legislation that provides certain reliefs/relaxations should be construed beneficially in favour of the applicable person. However, it is imperative to keep in mind that such harmonious construction should not, in any way, contravene the larger purpose of the act/statute/legislation under which it is found.
Allowing the Assessee to claim such a deduction would result in the revenue department incurring a loss while paving the way for notorious taxpayers to evade tax by seeking unauthorized deductions at the behest of ‘business expenditure.’
End Notes
[i] [2024] 164 taxmann.com 122 (Bangalore - Trib.) dated 25.06.2024.
[ii] [1967] 65 ITR 630 (SC).
Authored by Anshi Bhatia, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.
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